Cash-flow – it’s a vital aspect of every growing business. Below are some thoughts on how to best manage cash-flow and keep your business growing over the years.
Your invoicing needs to be right
Great cash-flow management involves strong invoicing. Never wait to invoice – once a product or service is delivered, the invoice shouldn’t be far behind. Waiting will hurt cash-flow and, in turn, your business. So, why not start the habit of quickly invoicing for payment?
Depending on the type of business you run, you might consider invoicing immediately or on a day to day basis. Providing a service? You might ask for an upfront deposit, or a payment mid-way through the process. It’s a reasonable request.
A delivered product or service might as well be cash for your business. Invoicing sooner leads to sooner payment.
Manage cash-flow in five rules
The start is invoicing. You’ll want to maintain a healthy cashflow. And, you’ll need more than strong revenue to do so. But, collecting that revenue is just as important. Use the following five rules to manage cashflow and get paid on invoices faster:
Accurate and up-to-date books
Cash-flow depends on accounting and reporting, so keep these up to date. Ideally, it will be done regularly (as in everyday) to have an ongoing status report of your business.
Don’t be a pushover when it comes to customers
Be stern, but fair. Having a strong invoicing strategy will go a long way, too. Be sure to have formal measures in place when necessary.
Always be aware of your accounts receivable turnover
An upward trend could mean you need to increase your efforts at collecting payment. The quality of receivables decreases as they age, so act as soon as possible.
Keep it simple – your accounting that is
Hire a professional if you’re not confident in your company’s numbers. Double check that you’re using quality accounting software – this will help you keep an updated cash position and forecast for planning.
Know your cashflow
Expecting a large order in the coming month? Do you have the necessary capital on hand to expand payroll where necessary? Or purchase the needed inventory? Don’t fall into the same trap of so many small businesses – know where your cashflow stands to ensure this doesn’t happen.
Track and measure everything
Keeping track of and reporting on key metrics for your business are inherent in a reliable system of accounting. This includes: aging accounts receivables, margins of operation and inventory turnover. Handle these metrics and your business will be in good hands – keeping you open to new opportunities.
Don’t combine your business and personal finances
To better understand your cashflow and forecast changes, you’ll want to be sure and keep the two separate. Otherwise, the uncertainty that results from doing so will have you scrambling. Keeping them separate will allow you to how much cash is being generated. This puts you in a great spot to properly pay yourself and still grow your business by utilizing the excess cash.
Take it a step further and establish a reserve of cash
Cash is the make or break of a business. Having a cash reserve has several benefits: a safety net for the unexpected, confidence to grow the business, insulation from economic cycles and banks/lenders actions and the ability to pursue opportunities at will. Consider the example of being able to get a deep discount on inventory, take on a large client or project. A cash reserve will allow this to happen.
The positives of a cash reserve are extensive for your business, however, it’s likely to mean your personal pay will suffer in the short term. But, in the long run your business is more likely to succeed, which is more money for you.
Cash-flow should work for you
Though cliché, “Cash is king” is a vital mindset for any small business. Sticking to the rules mentioned will help ensure that your cash serves you and not the other way around.
Contact us to learn more or discuss how we might help out your situation.
Chris Mitchell, MBA | Director of Client Insight